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Insurance Law

Texas Supreme Court Revisits Additional Insured Coverage for Deepwater Horizon Disaster

In In Re Deepwater Horizon, No. 13–0670 (February 13, 2015), [enhanced version available to subscribers], the Texas Supreme Court had occasion to consider the extent to which the scope of additional insured coverage is limited by the terms of a contract between the insured and the additional insured.

In April 2010, an explosion occurred on the Deepwater Horizon, a mobile offshore drilling unit operating in the Gulf of Mexico. The explosion killed eleven crew members and caused the unit to sink and discharge oil into the Gulf of Mexico for nearly three months. At the time of the incident, Transocean owned the rig and it was being operated by BP pursuant to a drilling contract (the “Drilling Contract”) between Transocean’s predecessor and BP’s predecessor.

In the Drilling Contract, Transocean agreed to indemnify BP for above-surface pollution regardless of fault, and BP agreed to indemnify Transocean for all pollution risk Transocean did not assume, i.e., subsurface pollution. The Drilling Contract required Transocean to carry comprehensive general liability insurance, including contractual liability insurance for the indemnity agreement, of at least $10 million. Transocean was also obligated to name BP, its affiliates, officers, employees, and a host of other related individuals and entities “as additional insureds in each of [Transocean’s] policies, except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of [the Drilling] Contract.”

At the time of the incident, Transocean was insured under a $750 million tower of general liability and excess insurance policies (“Policies”). BP was not specifically named as an insured in the Policies, an endorsement, or a certificate of coverage. However, the Policies extended “Insured” status to “[a]ny person or entity to whom the ‘Insured’ is obliged by oral or written ‘Insured Contract’ . . . to provide insurance such as afforded by [the] Policy.” An “Insured Contract” is defined as “any written or oral contract or agreement entered into by the ‘Insured’ . . . and pertaining to business under which the ‘Insured’ assumes the tort liability of another party to pay for ‘Bodily Injury’ [or] ‘Property Damage’ . . . to a ‘Third Party’ or organization.”

BP and Transocean sought coverage under the Policies for claims related to the Deepwater Horizon incident. After BP made a demand for coverage under the Policies, the Insurers sought a declaration that BP was not entitled to additional insured coverage for subsurface pollution claims arising from the Deepwater Horizon incident because the Drilling Contract limits the additional insured obligation to “liabilities assumed by [Transocean] under the terms of [the Drilling] Contract,” and the Drilling Contract provided that Transocean would indemnify BP only for above surface pollution, not subsurface pollution. With its interests in a finite sum of insurance imperiled by BP’s coverage claim, Transocean intervened in the litigation and aligned itself with the Insurers.

While the federal district court granted summary judgment, [enhanced version available to subscribers], in favor of Transocean and the Insurers, the Fifth Circuit reversed, [enhanced version available to subscribers], holding that Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), [enhanced version available to subscribers], and its state and federal progeny requires that the scope of coverage available to BP must be ascertained solely from the four corners of the insurance policies. Applying that principle, the Fifth Circuit found that the Policies impose no relevant limitations upon the extent to which BP is covered. However, on rehearing, the Fifth Circuit withdrew its prior opinion, [enhanced version available to subscribers], and certified the coverage question for the Supreme Court of Texas, [enhanced version available to subscribers].

The Supreme Court agreed with Transocean and Insurers’ argument about the applicability of the exception to ATOFINA as articulated in Urrutia v. Decker, 992 S.W.2d440 (Tex. 1999), [enhanced version available to subscribers]: a separate contract can be incorporated into an insurance policy by explicit reference clearly indicating the parties’ intention to include that contract as part of their agreement. The Court noted that BP is not named in any of the insurance policies, nor is there any claim or evidence that it is expressly included as an additional insured in an endorsement or certificate of insurance. Thus, if the coverage inquiry were constrained to the language in the insurance policy, BP would have no coverage at all.

Instead, the Policies confer coverage on BP by reference to the Drilling Contract in which (1) Transocean assumed some liability for pollution that might otherwise be imposed on BP (making that contract an “Insured Contract”) and (2) Transocean is “obliged” to procure insurance coverage for BP as an additional insured (making BP an “Insured”). Moreover, insureds are automatically included under the Policies only “where required by written contract, bid or work order.” As the Drilling Contract was incorporated into the Policies by virtue of policy language limiting additional-insured status to “where required” and as “obliged” by an oral or written contract, and the Drilling Contract explicitly provided for indemnification of BP by Transocean for only “above surface pollution regardless of fault,” the court found that BP was not entitled to additional insured coverage for the underlying claims.

    Brian Margolies, Partner, Traub Lieberman Straus & Shrewsberry LLP

Read more at the Traub Lieberman Insurance Law Blog, Edited by Brian Margolies.

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